2 top healthcare stocks poised for a bull run
Merck (NYSE: MRK) and Health Acadia (NASDAQ: ACHC) are radically different health values. Merck is one of the world’s largest pharmaceutical companies with 74,000 employees and a stock that pays a high dividend, while Acadia, with its 20,000 employees, is the largest standalone behavioral health company in the United States and avoids a dividend to focus on growth. .
What they share is strong financial momentum combined with undervalued stocks that are crying out for value at a time when investors are looking for safe havens whose stocks are poised to rise this year.
1. Merck: safe and smart play
Merck quietly set itself up for a solid year. The pharmaceutical company has had a slow start to 2022, with its shares rising 0.76% since January 1. But one need only take a close look at the company’s financials to understand why the stock should rise.
Merck has a low forward price-to-earnings (P/E) ratio of 15, far cheaper than most pharmaceutical companies with Merck’s pedigree. The company has recorded six years of increase in annual turnover. Last year, it reported revenue of $48.7 billion, up 17% from 2020. It also posted annual earnings per share (EPS) of $4.86. , up 173% from 2020.
What makes this exciting to me is that the gains are not due to a COVID vaccine, but to the company’s burgeoning portfolio of therapies. Keytruda is the company’s flagship drug. The oncology multi-tool generated $17.1 billion in revenue last year, up 20% year-over-year. A recent study in Science Translational Medicine said the drug might be able to kill latent HIV cells, which no other drug has been able to do.
The company’s other flagship drug, Gardasil, a human papillomavirus (HPV) vaccine, brought in $5.6 billion in revenue, up 44% from 2020, while Januvia, which lowers blood sugar in type 2 diabetes patients, brought in $5.3 billion, roughly on par with its 2020 revenue. The company also saw strong growth from its animal health therapies, which collectively brought in $5.6 billion. billion, up 18% from its 2020 revenue.
The well is also unlikely to run dry, as the company has around 100 drugs in its pipeline, including 25 in Phase 3 trials. In November, Merck completed its $11.5 billion acquisition of Acceleron Pharma, whose lead treatment, sotatercept, is in phase 3 trials as an add-on treatment for patients with pulmonary arterial hypertension.
The company also has a handsome quarterly dividend, which it has increased for 12 consecutive years, including a 6.2% increase this year to $0.69, and offering a yield of 3.42% – more than double the S&P500 the average is 1.27%. The company has pledged to increase the dividend, increasing it by 47% over the past five years.
2. Acadie: riding the wave of mental health problems
Acadia Healthcare operates 230 behavioral healthcare facilities, such as psychiatric hospitals and addiction centers, in 40 states and Puerto Rico. It is the largest standalone behavioral health company in the United States. Most of his payments come from Medicaid and commercial payers.
The company is on track for its third consecutive year of revenue and net profit growth. In the third quarter, the company said it expects annual revenue of between $2.295 billion and $2.315 billion, up from $2.09 billion last year. The company also expects diluted EPS of $2.51 to $2.59, compared to $2.20 a year earlier. Over the past 10 years, the quarterly earnings before interest, taxes, depreciation and amortization (EBITDA) margin has increased by 187%.
The company has also improved its leverage position, reducing its leverage ratio by 38% over the past 10 years. And last quarter it was a low .252.
The pandemic has taken a toll on mental health, and Acadie appears to be in the right place at the right time, due to increased funding and acceptance to support mental health and addiction issues. A study, by Future Market Insights, puts the compound annual growth rate of the behavioral healthcare industry at 3.4% from 2022 to 2028. According to the National Alliance on Mental Illness, one in five adults with United States suffered from mental illness in 2020, with one in 15 adults suffering from substance use disorder and mental illness.
Acadia shares are down nearly 10% year-to-date. With a forward P/E of 18.8, the stock price is well below the average hospital/healthcare facility forward P/E of 39.9.
Make your choice
I like both of these healthcare stocks, especially at their current prices. Merck’s oncology platform appears to be getting stronger; Additionally, its addition of Acceleron and late-stage pipeline could lead to increased sales in the coming year.
Acadia is a well-established player in behavioral health, and the heightened focus on mental health that the pandemic has highlighted is likely a driver for continued revenue growth.
Merck, due to its dividend, might be a safer bet in the long run, but Acadia likely offers more rewards — but with more risk — in years to come. Both must be solid, long-term investments.
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Jim Halley has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.